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Friday, June 16, 2017

Global Shale Law Compendium: Shale Governance in Argentina

Written
by Chloe Marie – Research Fellow

The Global Shale Law Compendium
series addresses legal developments and other issues related to the governance
of shale oil and gas activities in various countries and regions of the world.
In this article, we will highlight governance actions taken by Argentina to
develop policies specific to shale gas development.

Argentina
holds an estimated 308 Tcf of technically recoverable shale gas reserves
located within the Neuquen basin in the Vaca Muerta formation. Several local
and international energy companies have already begun exploration work,
including American Energy Partners, Dow Chemical Company, Chevron, Exxon Mobil,
Apache Corporation and Americas Petrogas, most of which partnered with
Argentina’s state-owned company Yacimientos Petroliferos Fiscales (YPF).

On
January 14, 2016, American Energy Partners, an Oklahoma-based company, signed a
joint venture agreement with YPF to drill exploration wells at the Bajada de
Anelo block covering 200km2 in the Neuquen province. The project is scheduled
for completion in 2018. As for Dow Chemical Company, it entered into a $118
million joint venture agreement with YPF in September 2013 to drill wells at
the Ol Orejano block in Neuquen province. In December 2015, YPF and Dow
announced that they would commit an additional $500 million investment to
exploit shale gas. On July 16, 2013, subsidiary Chevron Argentina S.R.L. signed
a $1.24 billion agreement with YPF for the development of shale oil and gas
resources from the Neuquen basin. ExxonMobil Exploration Argentina S.R.L.
invested $200 million to explore the Neuquen basin and now holds working
interest in the Bajo del Choique and La Invernada blocks with provincial
state-run oil company GyP Neuquen. On August 30, 2011, Americas Petrogas, a
Canadian company, entered into a farm-out agreement with ExxonMobil Exploration
Argentina S.R.L. for the exploration and potential exploitation of Los Toldos
blocks in Neuquen province. Finally, Apache Corporation, a Houston-based
company, partnered with YPF in the exploration of shale gas but, in February
2014, agreed to sell its Argentina energy assets to YPF for $800 million in
cash due to financial difficulties.

In
September 2015, YPF announced that it was in negotiations with Gazprom to
develop shale gas projects in the Neuquen region. In addition, Royal Dutch
Shell announced in September 2016, that it could invest $300 million in
Argentina through 2020 for shale gas exploration in the Neuquen basin.

The
Argentine Constitution provides for a federal union of provinces: 23 provinces
and one autonomous federal district, Buenos Aires. Provinces are fully
autonomous with their own Constitution, laws and judicial system, and local
governments organization. They, however, must not contradict the national
Constitution. Provinces also hold all the power that they chose not to delegate
to the federal government. With regard to the energy sector, the National
Secretariat of Energy and the Ministry of Federal Planning, Public Investment,
and Services represent the enforcement authority for the hydrocarbon regime and
set general rules for the oil and gas industry. Provincial governments,
however, retain the power to issue exploration permits and exploitation
concessions and set tax and royalty regulations. Under the Hydrocarbons Law,
provincial governments own the surface above oil and natural gas resources. As
for the national government, it owns offshore oil and gas fields. The
extracting companies own the minerals underneath the surface once extracted.

In
order to overcome the acute imbalance between energy supply and demand, the
government of Cristina Fernandez de Kirchner adopted law no. 27.007 in October
2014 reforming the prior hydrocarbon law no. 17.319, which dated back to 1967.
Under the so-called New Hydrocarbon Law, the Argentine government implemented
two main changes: (1) unconventional oil and gas development has been
integrated into the hydrocarbon regulatory framework, and (2) the powers of
provincial governments over the oil and gas sector have been restrained.

Before
the 2014 New Hydrocarbon Law, fixed price energy tariffs and utility rates
along with tough taxation dramatically discouraged foreign direct investment.
Thus, in an effort to encourage new investments, the Fernandez government
agreed on loosening up taxation, royalty and duration of E&P provisions
while standardizing concession agreements, bidding process and getting rid of
the carrying system.

In
that respect, companies investing more than $250 million over a three-year
period would receive tax exemptions and would be allowed to export 20% of
onshore production and 60% of offshore production free from export taxes. In
addition, the government set a standard royalty rate equal to 12% with
possibility for the provincial governments to increase it by 3% on each
concession extension. This 3% increase is subject to a maximum cap at 18%.
Furthermore, prior to the New Hydrocarbon Law, each provincial government could
include their own financial and legal requirements in the concession contract.
To avoid confusion among the investors, and in collaboration with the
provincial governments, the Energy Secretariat worked on the standardization of
concession agreements with common requirements.

The
Energy Secretariat eliminated the so-called “carrying system” by which foreign
exploration companies were required to partner with state-owned companies, and
the Fernandez government created a nationwide standardized bidding process
preventing each province from undertaking its own licensing round. Under the
New Hydrocarbon Law, all companies must go through the national bidding
process. Provincial governments are no longer permitted to assign new areas for
development. Finally, time periods for exploration and production have been
extended for conventional exploration permits (up to 11 years) and for
unconventional exploitation concessions (up to 13 years), and the Fernandez
government reduced oil export tariffs to limit the influence of low oil prices
on production.

At
the beginning of 2016, President Mauricio Macri, newly elected in December
2015, indicated that he wanted to attract “$20 billion in foreign investment
this year from energy to infrastructure as he tries to persuade global
investors that this time is different for Latin America’s third-largest
economy.” His plan to attract new foreign investment includes tax incentives
for foreign investment, access to international financial markets, decreasing reliance
on imported gas while developing trade, relaxing foreign currency controls, devaluing
the peso to reflect its real value, making exports more competitive, and updating
prices and tariffs to end subsidies.

Interestingly,
on April 27, 2017, Total, the French giant energy company, announced it launched the
first phase of shale gas development in the Vaca Muerta shale play. A company
executive declared that such project “is a key milestone in the development of
the giant Vaca Muerta shale play. Total is also increasing its interest in the
eastern part of the Aguada Pichana concession where the results of pilot wells
drilled to date have been excellent.”

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The Center for Agricultural and Shale Law (CASL) provides information and educational programs on agricultural and shale law and policy for producers and agribusinesses, attorneys, government officials, and the general public. The Center does not provide legal advice, nor is its work intended to be a substitute for such advice and counsel.